Friday, December 28, 2007

Anybody else getting a little tired of the publishing world’s latest infatuation—those books identifying “1001 [insert task here] You Must Do Before You Die”?

Here’s a list of actual such book titles, and I am not making them up:

1001 Movies You Must See Before You Die1001 Books You Must Read Before You Die

1001 Albums You Must Hear Before You Die

1001 Paintings You Must See Before You Die

1001 Buildings You Must See Before You Die

1001 Ankle Bracelets You Must Wear Before You Die

Actually, I made up the last one, but you get the idea.

The idea is that we must see “Batman: The Movie,” listen to Britney Spears’ “Baby One More Time” and read pretty much everything ever written by Phillip Roth, before we die, or else.

Personally, I'd rather watch a movie of Phillip Roth singing "Baby One More Time" than do any of those other things, but that's just me.

What will happen to those who don’t accomplish all these 1001 "musts" is not clear, but should a normal mortal ever in fact take the title commandments at face value, they would clearly have very little time left for anything else in their lives, let alone buying the stupid books in the first place.Rather than requiring us to perform only selfish acts—reading books and listening to albums and watching movies—why not make the required acts a little more socially relevant and easier to accomplish?

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Wednesday, December 26, 2007

It’s the day after Christmas, and, unless something has gone dreadfully wrong with either consumer spending or the Amazon.com press department, time for that Internet retailer’s “Best Ever” press release.

Sure enough, it’s right here on our Bloomberg:

Amazon Wraps Up Its 13th Holiday With Best Season Ever

Amazon.com, Inc. (NASDAQ:AMZN) today announced the 2007 holiday season finished as its best ever, with its busiest day being December 10. On that day, Amazon customers ordered more than 5.4 million items, which is 62.5 items per second…."We are very grateful to our customers," said Jeff Bezos, founder and CEO of Amazon.com. "On behalf of Amazon.com employees around the globe, we wish everyone happy holidays and best wishes for 2008.”As we pointed out last year, it would be a startling thing if Amazon.com—or, indeed, nearly every other retailer in America—did not report their “best ever” holiday season each and every year, what with the tendency of economies to grow.

Even poor old Target, which reported jaw-droppingly poor December same-store sales of roughly zero on Christmas Eve, could have truthfully declared its own “best ever” holiday season by including sales from new stores opened in calendar 2007.

In fact, there are probably 1,000 companies on the New York Stock Exchange that could have put out a press release today claiming “best ever” holiday sales—if sales were all that mattered.

But they aren’t.

Retail investors don’t focus as much on total sales as they do on existing store sales, which is a far better measure of true underlying strength—hence the calcuation of “same-store sales” for the benefit of investors and management alike.

When it comes to industrial companies, while strong sales are nice, investors want to know what’s happening below the line, what with the rising cost of everything from crude oil to soybean oil, not to mention labor, healthcare, insurance, rent and pretty much everything else that goes into a product.

As for service companies, well, not only did the New York Yankees achieve record attendance in 2007, but even the New York Mets had their “best ever” season in 2007—if attendance and revenue was all that mattered in Major League Baseball.

12/26/2006 "Amazon.com’s 12th Holiday Season is Best Ever"12/26/2005 “Amazon.com, Inc. today announced that the 2005 holiday season finished as its best ever…”12/27/2004 “Amazon.com’s Tenth Holiday Season is Best Ever…”12/26/2003 “Amazon.com Wraps Up Its Ninth Holiday With Busiest Season Ever.”12/26/2002 “Amazon.com today announced it has finished its busiest holiday season ever…”

Unless something goes very terribly wrong, we know what to expect to see on our Bloomberg next December 26.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Saturday, December 22, 2007

Starbucks recently opened its third store in our town—that’s one more than McDonalds has—and despite Wall Street’s concern over the recent downturn in Starbucks’ fortunes, its newest store is picking up extra business without crimping the other two stores one bit.

This is no big surprise: the first Starbucks in town grew steadily for years despite a second-rate location, until it was bursting at the seams. Lines reached the door at peak times and the under-sized parking lot generated at least one near-miss each morning among the bleary-eyed commuters zipping in and pulling out.

Local opposition delayed the second Starbucks for a while, but when it opened—four miles from the first, on prime real estate smack in the heart of town—it did gangbusters almost from Day One. And although it cannibalized the first store for about eighteen months, today the two stores are doing well over 50% more than the first did by itself.

Now, this third Starbucks will probably never be an above-average store: the location is odd and out of the mainstream traffic flow. Still, being a university town with 50,000 people who for the most part fit the Starbucks demographic, we could probably support one more Starbucks at the least.

After all, there are four Dunkin Donuts within our borders, and that’s not including the Dunkin Donuts “store-within-a-store” inside the local Stop & Shop, which does a land-office business, particularly in the mornings and especially on weekends, when grocery shoppers line up with shopping carts that actually contain built-in coffee cup holders.

Is this a great country, or what?

Am I the only person who never ceases to be amazed to see people lining up to buy donuts and coffee before they shop for food? Is pushing a shopping cart around a grocery store that much effort that people need coffee and donuts before they’re up to it?

Maybe Stop & Shop should consider letting Domino’s deliver right inside the store—pimply-faced teenage boys running recklessly around the aisles with little lights on top of dented, oven-warming shopping carts bringing pizza slices to calorie-deprived food shoppers pushing shopping carts with little pizza-slice-shaped warmers built into their shopping cart handles, right next to the coffee cup holders.

And don’t stop at the main meal—set up a Dairy Queen stand at the end of each check-out counter, so that after the stress of swiping their credit card and watching the clerk bag their groceries, Stop & Shoppers can load up on sugar for the five-minute drive home.

Here, unfortunately, I show my age. Dairy Queen might not be the most popular choice of an ice cream treat for most Stop & Shoppers these days, poor old “DQ” having been supplanted in our area of the world by Cold Stone Creamery.

Cold Stone does to excess what Dairy Queen started with its Oreo-filled ice cream Blizzard, mushing cookies and all manner of incongruous treats into ice cream with jolly names like “Cookie Doughn’t You Want Some” and “The Pie Who Loved Me” (Cheesecake ice cream, OREO cookies, Graham Cracker pie crust and fudge).

Teenagers love the stuff, and I can vouch for that: what used to be an after-dinner trip to Dairy Queen has turned into a late-night visit to Cold Stone.

Now, I don’t know for a fact what impact Cold Stone and other entrepreneurial ice cream ventures are having on Dairy Queen, but it can’t be good. Not that Dairy Queen seems to care: the “DQ” in our town looks like every other “DQ” that I’ve ever seen in this area of the country...a sad little faded-red-roof with white siding structure in a dingy lot on a crowded section of strip malls along Route 1.

I have not been there in years—since the girls grew out of that particular style of soft ice cream around third grade—but my memories of the handful of visits we took are not fond.

For starters, just finding a parking spot at the DQ on a hot summer night can be hazardous, what with hormone-charged teenage boys fighting for the inadequate number of spaces in a parking lot that was never zoned for peak demand levels of hot summer nights.

Then there’s the building itself, which is straight out of “American Graffiti” and nearly as outdated as the America that movie portrays, with only walk-up service at a pair of sliding windows along a stainless steel counter.

You wouldn’t mind the atmosphere—cars, boys, and the stale cool air wafting from the window—if the lines moved along nicely, but on a hot summer night they are long and spectacularly inefficient. Absolutely no effort has been made to implement McDonalds-type efficiency engineering on line control. Nor has much thought been put into the order process itself: whoever catches the attention of the sweaty, underpaid workers behind the glass is next.

Still, like any terribly managed customer experience—the Post Office on a good day, for example, or the airline counter of a flight that’s been cancelled—you feel that much better once you reach the head of the line and your order’s actually been taken.

Then you wait, and while you wait you try to avoid the stale air peculiar to ice cream shops, as well as the sticky stainless steel counter and the cars zipping in and out of the lot. After getting the cones and handing them out to your children, you pay, invariably exchanging normal dollar bills for change that comes in damp and crumpled bills, or sticky coins, or both. Back in the car you discover that the cups never hold the stuff: whatever flavor you bought eventually gets worked into the baby seat or the car seat.

It is not an experience I particularly recommend.

Still, the ice cream itself is fine, and kids especially love the chocolate covered cones. But aside from quieting down antsy toddlers on a hot summer night, there is no great reason to schlep to a “DQ” any more than any other ice cream joint.

After all, “The Blizzard” was the last major new product from Dairy Queen, and that was in 1985. Its initial revelation—that you could smash Oreo cookies and candies into ice cream—has long since been surpassed by Cold Stone Creamery and others.

Indeed, hot summer nights aside, the local “DQ” might as well be a spare parking lot for the businesses nearby—and, in fact, in December that’s what happens: it becomes a Christmas tree lot.

Now, I recognize that the northeast part of the country may not be the dream market for an ice-cream shop. In fact, there are only about 50 Dairy Queens in the New York/New England area, while Texas alone has 115.

But there are plenty of Dairy Queens in the cold-weather states of Minnesota and in DQ’s home state, Illinois (the original store on which Dairy Queen was based opened in Kankakee, made famous in the Arlo Guthrie song “City of New Orleans”), not to mention Michigan and Wisconsin, which has 37 Dairy Queens.

And summers in Wisconsin are not exactly long.

So why has Cold Stone Creamery—which was started in 1988, fifty years after Dairy Queen—already overtaken Dairy Queen in my home state?

Well, have you been to a Dairy Queen lately?

Lousy locations, decaying plant and the fact that the last really new product was introduced 22 years ago might be part of the answer.

Another part of the answer might be the fact that Dairy Queen is owned by Berkshire Hathaway, which is, of course, controlled by Warren Buffett.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Thursday, December 20, 2007

“How (inaudible) is this? Steve, let’s go. There’s no questions, let’s get the (expletive) out of here.”

—Al Lord, CEO Sallie Mae Corporation

Call Woodward and Bernstein—it’s Conference-Gate!

That’s right: the official replay of Wall Street’s most famous conference call has been tampered with!

I am not making that up.

In a cover-op worthy of Nixon and his Watergate-era tape-erasing scandal, the best part of yesterday’s Sallie Mae conference call—CEO Al Lord’s above-quoted “let’s get the (expletive) out of here” which even the Wall Street Journal highlighted in this morning’s article on Lord’s melt-down—has been deleted.

That is a shame, because yesterday’s call ranks right up there in the upper pantheon of our Patrick Awards, whereby NotMakingThisUp semi-regularly awards Wall Street’s Finest and Corporate Bigs alike for whatever strikes us as particularly outré commentary, in a realm where outré commentary is generally the norm.

In fact, the Sallie Mae call will probably go down as one of the Top Ten Train Wrecks of All Time.

Get a load of this:

Bill Cavalier—Société Genéralé

Can you talk a little bit about the pass-through market? Clearly, there is pretty much no appetite for student loan paper at this point. What are you being told about when you think there will be a market for your pass-through notes so that we can start to do some….

Al Lord—CEO

I’m not sure what you’re talking about. I’ve been talking to whom?

Bill Cavalier—Société Genéralé

When you do a securitization, right, you have a bank that arranges -- that actually does the arranging, right, you have an arranging bank. Somebody must be telling you something about what the market is looking like, what their expectations are for next year…. We're trying to put together projections here, Al. We're trying to figure out what your stock is going to be worth, and you have got to give us some guidance, you've got to give us some numbers. I don't even see a margin number here for the stuff that you've done. Can you give us some handle on what your stock is worth?

Al Lord—CEOYou should give Steve [McGarry, IR guy] a call.

Bill Cavalier— Société GenéraléBut you’re the CEO. You’re the guy who just took over the company.

Nothing on paper, virtual or hard copy, can replicate the angst, anger and frustration projected in those words as spoken by Mr. Lord and the investors and analysts asking questions: it must be heard to be believed.

Unfortunately, the Big Moment—Mr. Lord’s final blowing-off of the accumulated pressure as head of a company caught up in both the highly public collapse of a private equity transaction of its making and a credit crisis not of its making—no longer exists.

That’s right.

Mr. Lord’s “How (inaudible) is this? Steve, let’s go. There’s no questions, let’s get the (expletive) out of here” has been erased from the conference call replay.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Monday, December 17, 2007

SELL BUFFETTWarren Buffett’s Berkshire Hathaway is a great company, but its stock is now overpriced.—Barron’s, December 17, 2007

So say the editors of Barron’s, on this week’s cover no less.

And while the editors set up their negative call by claiming “Barron’s has been bullish on Berkshire in recent years,” this is in fact not the first time Barron’s suggested selling the stock.

The first time, I recall, was back in the early 1990’s, when a hedge fund manager reconstructed the bottoms-up value of Berkshire Hathaway—which is not all that hard to do using the public market values for the companies whose stocks Berkshire owns, plus a reasonable estimate of the market value of the companies Berkshire owns outright, insurance being the bulk of the value—and concluded Berkshire Hathaway stock was over-priced at a bit under $6,000 per share.

Last trade was $143,000.

So don’t be too surprised if few Berkshire shareholders take the magazine’s current conclusion—that the shares are actually worth ‘only’ $132,000 each—to heart.

In typical Barron’s fashion, the current article, with a headline at once emphatic and apologetic—Sorry, Warren, Your Stock’s Too Pricey—contains a few whoppers that will leave longtime Berkshire watchers shaking their heads, including this:

“Berkshire isn’t easy to analyze because of its complexity and because Buffett communicates little with investors save for his appearance at Berkshire’s annual meeting in May.”

While it is true Berkshire engages in no quarterly earnings conference calls with Wall Street’s Finest, Buffett’s communications with investors make up in quality what they lack in quantity.

The heart of Buffett’s annual meeting is a question and answer session with shareholders that spans more than five hours and several dozen questions from any and all comers, yielding long discourses from the Chairman himself on whatever is on his investors’ minds. (See the 11-part "Pilgrimage to Omaha" series here last spring, in which we covered the 2007 meeting.)

Compare that with the typical S&P 500 corporate annual meeting, run by accountants and lawyers and yielding next to no useful information regarding the company, its business, and its management’s long-term thinking, and you’d say Berkshire’s meeting is hands-down the more valuable.

Furthermore, Buffett writes his own annual letter to shareholders, and he takes 20-plus pages, single-spaced, to explain what happened the previous twelve months—a far cry from the normal one or two page, relentlessly upbeat PR job littered with cringe-making catch-phrases such as “core competency” that most investor relations professionals write for their company’s CEO.

While it is true that Berkshire does not disclose much in the way of sales and margin data for individual operating companies such as Shaw Industries and Dairy Queen (and there is good reason for that: a number of Berkshire's businesses are on the decline) the fact is Buffett communicates a great deal more usefully than most CEOs on Wall Street.

He simply leaves out the quarterly earnings patter with the endless “great quarter, guys” backslapping of Wall Street’s Finest.

The other whopper from the editors of Barron’s concerns the issue of Buffett’s age, and it reveals more about their fundamental misunderstanding of Buffett’s role at Berkshire than it does about how long Buffett is likely to stay on the job:

Buffett turns 78 next August, and his actuarial life expectancy is nine years. He’s likely to stay on the job for as long as possible, but in reality few CEOs can handle the demands of the job much past 80.

Yet Buffett is nothing like other CEOs in the way he handles the “demands of the job,” for he has outsourced most of the heavy lifting other CEOs routinely endure in the course of their careers.

Buffett, as we said, does no quarterly conference calls. Nor does he do investment conferences or much of the other public-company glad-handing most CEOs regard as a “demand of the job.”

Furthermore, he does not actively manage the companies beneath him, leaving that to the individuals who have run the businesses for, in most cases, at least thirty years.

Aside from the occasional jaunt to Washington to testify before Congress or his recent trip to China, all that delegation of authority leaves Buffett the time to do what he likes best: to sit in his office, read annual reports and talk on the phone with people he likes.

Hardly “demanding” and likely to lead to an early grave.

Still, the Barron’s story includes at least one worthwhile observation, despite the otherwise superficial discussion of potential risks such as Buffett’s age:

What Buffett now calls a group of “wonderful businesses” may be viewed in the future as a hodge-podge of unrelated companies.

While the businesses are indeed unrelated—they range from retail furniture stores to carpet mills—it is Buffett’s famed desire for as much of their cash flow as he can keep, in his primary role as Berkshire Hathaway’s capital allocator, that may be more of an issue in years to come.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Saturday, December 15, 2007

Yes, that’s right. Government statisticians have figured out that inflation is rising!

According to the online Wall Street Journal,

An unexpectedly large jump in consumer prices last month suggested inflationary pressures haven't receded and the Federal Reserve may have less latitude than markets believe to lower interest rates to cushion the economy.

The Labor Department reported that its November consumer price index rose by a seasonally adjusted 0.8% from October, the largest monthly gain in two years and a 4.3% yearly increase.

While last month’s consumer price increase may have been “unexpected” to readers of the Wall Street Journal, they were not to readers of NotMakingThisUp.

In fact, we have been accused of writing so frequently about emerging inflationary pressures from China that the blog should be renamed “Cute Stories About Inflation.”

Nevertheless, judging by the reaction of financial markets to yesterday’s news, inflation is no longer cute. Indeed, an astonishingly large number of people seemed shocked—shocked!—by the Labor Department statistics.According the the Journal:

Stephen G. Cecchetti, a global finance professor at Brandeis International Business School, called the consumer price index numbers "scary" because price pressures were widespread in the report. Apparel prices jumped 0.8% in November while shelter and medical care costs also rose faster than expected.

Professor Cecchetti might have been less “scared” had he read “China’s Newest Export: Inflation” on these virtual pages three months ago.

If he had done so, he would have found nothing in yesterday's numbers at all surprising, least of all the apparel price inflation, which we flagged well before the bean-counters at the Labor Department—on September 5th, in fact:

While it is no secret that labor costs, and environmental costs, and energy costs are rising, along with the cost of just about everything else China needs to feed the manufacturing beast that now supplies American with 8 out of 10 everything, according to government statistics I just made up, the magnitude of the overall cost increase is certainly a shock to at least one major retailer of Chinese-sourced goods.Like, 50% shocking.I am not making that up: word out of one significant retailer is that some of the China-sourced merchandise they were expecting to cost, for example, $10 a unit prior to packaging, shipping, handling and mark-ups, is coming in at $15 a unit.

—“China’s Newest Export: Inflation” September 5, 2007

It might be churlish to wonder aloud why a "global finance professor" was not aware of what has been happening on the other side of the globe from his ivy-covered tower on the hills overlooking the Charles River for the better part of two years.But we wonder anyway.Jeff MatthewsI Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Wednesday, December 12, 2007

The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall….—Alan Greenspan, The Wall Street Journal

Thus former Fed Chairman Alan Greenspan ("Easy Al" to his detractors and "The Undertaker" to his mentor, Ayn Rand) begins his latest attempt to rewrite history, in a remarkable op-ed piece in today’s Wall Street Journal: “The Roots of the Mortgage Crisis.”

And NotMakingThisUp is happy to report that today’s piece is every bit as full of bizarre self-justifications as Greenspan’s recent autobiography, “The Age of Turbulence.”

(That book is so off the charts that we speculated the working title must have been “Purple Haze, All in My Brain, Rainy Days You Don’t Seem The Same, One Pill Makes You Larger and One Pill Makes You Small, but I Get High With a Little Help From My Friends so Why Does it Feel Like They’re All Staring At Me?”—see “‘The Undertaker’ and his Economic Doobie Brothers” from November 18).

Now, we all know what Greenspan is up to here, don’t we?Greenspan—the most revered Fed Chairman of all time, except by the gold-bugs, economic Cassandras and short-sellers who fruitlessly fought his easy money policy for nearly 20 years—wants desperately not to be blamed for the housing bubble that his easy money policy caused.

To paraphrase Pink Floyd, that’s what the writing’s all about, and Greenspan makes no bones about it in the heart of today's piece, 10 paragraphs down:

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

In other words, Alan Greenspan wants us to believe that the most powerful Fed Chairman in U.S. history was powerless to stop the greatest housing bubble of U.S. history, despite the fact that he stood at the monetary control button that directly inflated that bubble.

But he’s a Republican, and a cagey politician at that, so he’s not going to try to avoid responsibility altogether:

I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices.

Thus Greenspan opens the door to an admission of what any—and I mean this literally—fool knows: that his 1% pedal-to-the-metal interest rate policy during one of the great world economic booms of all-time had everything to do with the ensuing drama.

But he opens the door no further, and quickly shuts it with this whopper:

In my judgment, however, the impact on demand for homes financed with ARMs was not major.

Before you have time to spit out your coffee, “Easy Al”—as he was known throughout his brilliant career—tries to explain himself with an outright fake conclusion from a meaningless data point:

Demand in those days was driven by the expectation of rising prices -- the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted). [Emphasis added]

The fact that home prices continued to rise after the peak of ARM originations—“seasonally adjusted”!—is as meaningless as anything else in this tract. Anybody who knows anything about free markets knows that incremental demand by uninformed buyers is what drives bubble prices to their peaks.

The rest of “Roots” is a tale told by a politically savvy retired Fed Chairman eager for long-term glory, full of data and the kind of “woulda, coulda, shoulda” self-justifications that don’t mean a thing to the poor shlub enticed into a low-interest ARM five years ago when “Easy Al” set a marginal interest far below the true rate of inflation.

Which, by the way, is the true root of the mortgage crisis.

Unfortunately that’s not long enough for an op-ed piece in the Wall Street Journal.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Monday, December 10, 2007

I’ve never understood why the trial lawyers went after the paint companies.

I know it’s good business for trial lawyers, if not for the rest of society, to threaten an industry with lawsuits up the proverbial wazoo while claiming injuries on behalf of some poor, helpless class of humanity—in the paint case it was the millions of children who supposedly grew up munching lead paint on window sills, as if munching lead paint was a big thing to do—in hopes of settling for billions of dollars to go away and move on to the next big cash cow.

Fortunately for society, if not the trial lawyers, the lead paint cases don’t seem to have captured the imagination of judges and juries the way the asbestos issue did, and it seems that eventually the trial lawyers will have to pick another target in order to keep up their lifestyles—which, if the vacation home of one of the lead paint lawyers I know is any indication, is pretty high.

So why don’t the trial lawyers go after the alcohol companies, and do something worthwhile?

After all, the cost to society of alcohol abuse trumps the innocent children munching lead paint hands-down. Ask any cop how many situations in his or her day—theft, “domestics,” auto—involve alcohol: it’s nearly all…except for those that involve drugs.

Today's New York Times reports that at least one lawyer—a government prosecutor in Phoenix—is doing something interesting and worthwhile about drunk driving, the most public facet of alcohol abuse, without resorting to multi-billion dollar lawsuits:A conviction for driving under the influence of alcohol is something many people try to conceal, even from their families. But now the bleary-eyed, disheveled and generally miserable visages of convicted drunken drivers here, captured in their mug shots, are available to the entire world via a Web site.

The hall of shame is even worse for drunken drivers convicted of a felony. A select few will find their faces plastered on billboards around Phoenix with the banner headline: Drive drunk, see your mug shot here.

The Web site and billboards, which began last month, are the brainchildren of Andrew P. Thomas, the county attorney here…

—New York Times

This innovative, low-cost way of publicly holding individuals responsible for their actions has, naturally, offended certain people who hate simple, low-cost ways of dealing with problems—namely the lawyers who defend drunk drivers in court.

“I just can’t believe he’s doing it,” said Mark Weingart, a defense lawyer in Tempe who has advised hundreds of people facing charges of driving under the influence. “Besides the fact that it is in bad taste, D.U.I.’s usually involve somebody with no criminal history. The downside to this person being published on the Web site is tremendous. I don’t see the point. Why doesn’t he put sex offenders up there?"

How “bad taste” enters the equation is beyond me. For a drunk who’s killed or injured or risked death or injury to an innocent bystander by virtue of getting behind the wheel of a car, “taste” seems to be the last thing to worry about.

Nor do I grasp the distinction between a convicted drunk driver with a criminal history and somebody without one. I know elected officials who've had DUIs wiped off their records, thanks to pals in high places, and regard them as something to be hushed up, not as a symptom to be dealt with.

Should the ability of people like that to drink and drive without severe consequences lead to an innocent’s death, their lack of a criminal record will mean very little to the families on the other side of the court room.

Presumably Mr. Weingart would rather see his own advertisement—of the “1-800-LAWYER” kind—up on the billboard than his last client’s mug. Me, I’d rather know which of his past clients are still on the road before I meet them there unexpectedly.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Thursday, December 06, 2007

It is the Page Six headline in yesterday’s New York Post—the Official Newspaper of Record here at NotMakingThisUp.

You are forgiven if you think the following details of the story are more appropriate for, say, The Donald than for a smart young man whose company’s informal code of conduct is, literally, “Don’t Be Evil”:

The wedding this Saturday of Google co-founder Larry Page on a tiny Caribbean island is a logistical nightmare for planners who are flying in 600 guests on private planes and trying to find deluxe hotel rooms for all the bigwigs….

[Wedding planners] “had to book all the hotels on the neighboring island of Virgin Gorda….so that Page’s wedding could be completely private.”

Indeed, some readers of NotMakingThisUp might recall that just last week Google announced an ambitious clean energy plan called “Renewable Energy Cheaper than Coal” in a press release containing four full paragraphs quoting Mr. Page, starting with this one:

“We have gained expertise in designing and building large-scale, energy-intensive facilities by building efficient data centers,” said Larry Page, Google Co-founder and President of Products. “We want to apply the same creativity and innovation to the challenge of generating renewable electricity at globally significant scale, and produce it cheaper than coal.”

Yet nowhere in the Google press release was it mentioned that Mr. Page has had to apply 'creativity and innovation' to the challenge of putting dozens of private jets in the air for the noble purpose of having a really awesome wedding in the British Virgin Islands.

But creativity and innovation are precisely what has been required, because this wedding is no last-minute, “let’s go to Branson’s place” whim of the eligible Mr. Page coming on the heels of a Britney Spears-type Lost Weekend in Vegas: in fact, The Post reports that Mr. Page’s “planners” have been “working six months in advance” on the nuptials.

Hey, it takes time to coordinate the CO2-dumping logistics of inefficient private jet travel for 600 people!

In fact, those jets will discharge anywhere from 2,000 to 10,000 pounds of CO2 per hour of flight—depending on what size jets the 600 fab guests take—while sucking down 200 to 500 gallons of fuel every sixty minutes.

Of course, those are pikers compared to the rather large Boeing 767 wide-body Mr. Page shares with Sergey Brin, which they keep parked at Moffett Field across Route 101 for things like, well, flying inefficiently to Necker Island just because they can.

Long-time readers know that I’m a fan of Google’s business model, particularly the company’s entirely un-Microsoftian method of innovation—which is to hire the best engineers and give them big targets to shoot for…but also to let them spend 20% of their time on whatever excites them.

If and when those engineers come up with something useful—like, say, Google Maps or Google Mail or Google Scholar or Google Documents—the company throws it out there as a 'beta' product so real people can use it and help the company refine it into a mass market product.

That kind of free-wheeling, market-driven methodology draws unrestrained contempt from the promise-the-world-and-give-an-unattainable-but-market-freezing-deadline types in Redmond, but it’s certainly worked in Mountain View.

As long-time readers also know, I believe we’re firmly in the grips of a human-caused climate warming easily observable in the alarming, everyday changes right outside our doors.

Consequently, I thought Google’s “renewable energy” announcement last week was a nice, positive, worthwhile step forward by a company with the money and the smarts to come up with something more helpful than the chirpy newspaper ads favored by BP and other green-acting companies.

And we’ll need something helpful faster than anybody thinks: just today scientists from Mr. Page’s alma mater—Stanford University—released a study suggesting climate change could cause nearly a third of bird species to go extinct within a hundred years.

Seems to me that by putting hundreds of private jets in the air for the sole purpose of getting together on a private island several thousand miles from his home to say "I do," Mr. Page is, in his own way, doing precisely what the company he co-founded expects its own people not to do: a kind of evil.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Tuesday, December 04, 2007

Cutting through the normal cacophony of the pom-pom waving crowd of Wall Street’s Finest—including a certain analyst’s reduction of his E-Trade price target from $19 a share to $8 (last trade $4.11), which I am not making up—comes the clarion sound of an actual interesting, forward-looking statement by Susan Chen of Merrill Lynch, following last night’s earnings call with BearingPoint, the troubled consultant to other companies:

“Revenue from Financial services declined 31.6% y/y. Besides the winding down of a large contract and continued senior staff defections, BE reported some early terminations by large banking clients in response to the recent asset/CDO write-downs in the industry. This is alarming as BE is the only company so far that has reported some meltdown/IT budget cuts in this vertical. We may see some weakness during 4Q earnings by other firms in the next few weeks.” [Emphasis added]

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Friday, November 30, 2007

The funniest headline you will read today is on Bloomberg, under Motorola, and, yes, it concerns the sudden departure of Ed Zander as CEO.

The headline is this:

“Motorola’s Zander ‘Anxious to Spend Time With Family’”

Puh-leeze!A hyper-aggressive marketing guy who’s been running pedal-to-the-metal at five different technology companies since 1973 (Data General, Apollo, Sunsoft, Sun Micro and Motorola) is voluntarily leaving the company he nearly brought to its knees while RIMM and Apple stole its soul, in order to kick back and watch Jon Stewart with his kids?I mean, do they even know what he looks like in daylight?

“Mom, who’s that guy in our living room?”“Oh my God—a home invasion! Grab the cat, Timmy and run—I’ll call the police!”

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Wednesday, November 28, 2007

Five years ago, when Sears was buying Lands’ End—the Wisconsin-based catalogue company whose high quality wares uniquely suited the wealth-building baby boomer generation that was abandoning Sears left and right—I wrote a letter to Lands’ End founder Gary Comer.

Having met Mr. Comer—who was as straight and genuine as they come—a few times over the course of Lands’ End tenure as a public company, I congratulated him on the $1.9 billion price and also expressed condolences that he was selling such a franchise to Sears.

At the risk of coming across like a wise-guy, I also suggested he keep some of that well-earned money for the day when Sears decided they’d ruined a good thing and wanted to get Lands’ End off their hands, and he could get it back for pennies on the dollar, or at least nickels.

It took a few years, but, sure enough, rumors of just such an event began to fly when it had become increasingly apparent that Sears’ original notion wasn’t happening.

Sears, it might be recalled, had expected Lands’ End to pull into Sears’ stores precisely those up-and-coming boomers who otherwise would not be caught dead in a Sears store—no offense to Sears or its own particular franchise, which was once mighty and is now slowly withering to what may eventually be a large footnote in retailing history.

We're acquiring a great brand, [and] introducing it into our stores...it will attract new shoppers...who will connect with our apparel departments better than they would have in the past…

That’s what then-CEO Alan Lacy said at the time of the deal, and he couldn’t have been more wrong.

Lands’ End today, as far as I can see when I visit a Sears, has become nothing more than yet another private label in the pantheon of Sears private labels, barely distinguished from any other Sears brand.

Yet now, apparently, the company wants to repeat the mistake on a slightly smaller scale by buying Restoration Hardware, the upscale and snooty vendor of whatever anybody needs to make their McMansion look, well, upscale and snooty, for $269 million.

Sears Holdings, which operates the Kmart and Sears, Roebuck chains, disclosed last week that it owned a 13.7 percent stake in Restoration and had initially proposed a $4-a-share bid after being informed in late October that Restoration was weighing a management buyout.

Sears, based in Hoffman Estates, Ill., asked a special committee of Restoration’s board for confidential information to submit a binding proposal, but the request was denied, according to the letter to a special panel of Restoration’s board attached to the S.E.C. filing.—The New York Times

Now, who’s to say Eddie Lampert, the genius who created billions of value by buying the cast-offs of American retailing—Sears and K-Mart—and shmooshing them together, can’t do the same with Restoration Hardware?

And I would bet money that the Restoration Hardware customer who’d otherwise have thought nothing about paying $389 for a European Goose-Down Comforter at that cute little wood-paneled store on Greenwich Avenue or in the Stanford Mall would, once they learned Sears owned the joint, think twice or three times before eventually not buying there altogether.

Seems to me Sears might instead take that $269 million—which is almost exactly half the company’s annual capital expenditures—and make its own aging store base at least presentable before stuffing it with brands its own customers can’t afford.

Still, that’s what makes a market.

Gary Comer—who gave much of his fortune to help the less fortunate in the South Side of Chicago, where he grew up—is no longer with us.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Friday, November 23, 2007

It took a few days of contemplation and a three hour, post-Thanksgiving dinner session of Risk, The Game of World Domination, but I think I’ve figured out Starbucks’ problem.

What could Risk, The Game of World Domination, have to do with Starbucks’ problem?

Very little, actually.

It’s just that a few hours spent on nothing but the task of accumulating armies, defending the wonderfully hard-to-attack Australia against all comers, and contemplating how best to destroy brothers-in-laws before they destroy you leaves one’s mind clear to resolving bigger issues, such as what is wrong with Starbucks.

And what is wrong with Starbucks has nothing to do with the taste of the coffee, the rising price of milk or the fact that there are so many Starbucks around the country that Wall Street’s Finest are muttering the word “saturation.” (I think the last word on this topic came from The Onion, which once carried the banner headline: New Starbucks Opens In Rest Room Of Existing Starbucks).

No, the problem with Starbucks is Paul McCartney. At least, I’ve come to believe Sir Paul is driving customers away.

This is because I’ve been trapped beneath a speaker for the last couple of hours at our local Starbucks during which time Sir Paul’s latest album, “Memory Almost Full of Lousy Songs,” which Starbucks released under its own music label, has been playing and re-playing to the point that I am ready to pay them to turn it off.

Well I was found in the transit loungeOf a dirty airport townWhat was I doing on the road to ruinWell my mama laid me downMy mama laid me down

Those are actual lyrics, and I am not making them up.

Whatever happened to “Blackbird singing in the dead of night/take these broken wings and learn to fly” or “Penny Lane there is a barber showing photographs/of every head he’s had the pleasure to have known”?

Put these new, dreadful lyrics together with old, familiar riffs ranging from the worst of Wings, which was pretty bad, to his “Your Mother Should Know” period with The Beatles, which was awful, and it’s not a stretch to believe that Dave Barry was right: some time during the decade after the Beatles broke up Sir Paul must have been taken over by a Pod Person.

How else to explain lyrics that sound like they were copied from a Hallmark card for the recently widowed?

At the end of the endIt’s the start of a journeyTo a much better placeAnd this wasn’t badSo a much better placeWould have to be special

Hey, why not just put on a double album of Yoko Ono imitating cattle being prodded in a shopping mall on Black Friday, and really drive away the coffee-drinkers?

Come to think of it, perhaps I could have defended Australia in our epic battle of Risk, The Game of World Domination had I been humming a little post-Beatles McCartney, which surely would have driven my brothers-in-laws quite mad. More likely, though, it would have invited even more aggressive attacks than I suffered, possibly involving blunt objects, just to get me out of the room.

The only thing worse than standing in line for five minutes at a Starbucks must be standing behind the counter mixing coffee drinks for five hours while Sir Paul sings:

Only mama knows why she laid me downIn this God-forsaken town

Only mama knows not only why he wrote not only those God-forsaken lyrics, but then decided to record them, and why Starbucks management decided to cut a deal with Sir Paul that requires them to actually play “Memory Almost Full of Lousy Songs” in a room full of people looking anxiously at the exits.

Starbucks baristas unite! Rip out the speakers! Help turn around Starbucks today!

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Driven by billions of dollars in share buybacks, record-setting buyouts and a wave of mergers, the amount of stock in the market shrank by hundreds of billions of dollars in the past four years.

With the supply of stock down and demand strong, the market rallied. Now, as the economy slows and credit markets buckle, high-profile companies are cutting back on buybacks, and some wish they held on to the cash they gave back to shareholders.—Wall Street Journal, November 21, 2007

So says today’s Wall Street Journal, although this is not news to readers here at NotMakingThisUp (see “The Shareholder Letter You Should, But Won’t, Be Reading Next Spring” from August 8, 2007.

Nevertheless, lest anyone think the Journal is making much ado out of nothing, I would say the Journal goes too easy on those Captains of Industry who chose to pump up their stocks for short-term gain and fleeting kudos from Wall Street’s very fickle Finest.

After all, today’s story politely leaves out one of the all-time great admissions of regret—ranking right up there with Chamberlain after Munich, business-wise—which came yesterday morning from one of the most aggressive practitioners of the “return value to shareholders” school of balance sheet destruction: Steve Odland, the CEO of Office Depot.

We are very disappointed in our third-quarter results and remain concerned about the economic environment over the next few quarters. We are also very unhappy with our stock price.

Unfortunately, we have cleared the balance sheet of cash, and our operating cash flows declined, so we don't have the opportunity to buy back shares at a time when we believe they are a huge value. [Emphasis added.]

Specifically, Office Depot “cleared the balance sheet” of $200 million this fiscal year by buying 5.7 million shares at $35 a share.

While that doesn’t sound like much, it came after “clearing the balance sheet” of $971 million in fiscal 2006 by buying 26 million shares at an average price of $37 per share. (Last trade--you don't wanna know.)

Where this leaves Office Depot as a stock, we express no opinion, but management at Target ought to think twice about listening to the barking seals otherwise known as Wall Street’s Finest—the analysts who applaud companies such as Office Depot for giving short-term oriented shareholders short-term rewards such as high-priced stock buybacks without any notion of the kind of painful long-term consequences now being suffered by Office Depot’s shareholders:

Nov. 20 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, posted an unexpected decline in quarterly profit after consumers facing higher mortgage payments and gasoline expenses cut spending. The retailer also said today it will buy as much as $10 billion of its stock, which lost almost a quarter of its value since reaching a record in July….``It's the right thing to do to leverage up their balance sheet and buy back stock in the face of slowing overall sales growth,'' [emphasis added] said Jeffrey Klinefelter, an analyst at Piper JaffrayCos. in Minneapolis, who recommends investors hold their shares.

I’d like to see Mr. Klinefelter tell that to a room full of Office Depot shareholders, and get out alive, or, at the very least, with his flippers still attached.

Our metaphorical hat goes off to the Wall Street Journal for flagging a timely and important topic...but how they left out the best part of the Office Depot call is beyond us.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Sunday, November 18, 2007

Anybody else out there think the original title of Alan Greenspan’s recent memoir of his time as Federal Reserve Chairman (“The Age of Turbulence”) must have been something closer to “Purple Haze, All in My Brain, Rainy Days You Don’t Seem The Same, One Pill Makes You Larger and One Pill Makes You Small, but I Get High With a Little Help From My Friends so Why Does it Feel Like They’re All Staring At Me???”?

I mean, how else to explain the following statement by the man Ayn Rand used to call “The Undertaker” ostensibly because of the dark suits and sober demeanor he wore during their smoke-filled late-night debates, although I am coming to believe both his demeanor and the smoke actually owed more to some lethal Maui Wowie he must have kept stashed in the lining of his Brooks Brothers’ vest pockets, if you get my drift:

Nov. 18 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline hasn't affected the global economy and is a ``market phenomenon.''``So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it's a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences,'' he said today.

Huh?Did he really say a falling Dollar has no real fundamental economic consequences?What’s with Fed Chairmen these days?

First Greenspan’s successor flatly denies the deflationary impact of the Chinese labor arbitrage (see “Fed Big Flunks Eco 101” from March 7, 2007) of the last decade, and now Greenspan himself claims to see no link between the falling value of the U.S. Dollar and inflation in the United States.

Regarding the former issue, readers may recall that I offered to put Mr. Bernanke in touch with an American businessman who experienced first-hand the massive and deflationary impact of China’s manufacturing policy throughout the last decade.

I now offer to put Mr. Greenspan in touch with an American businessman who is currently experiencing first-hand the massive and inflationary impact of the recent collapse in the U.S. Dollar.

His name is Ron Moquist, and he is the CEO of Raven Industries Incorporated.

Now, Mr. Moquist wouldn’t know me from Alan Greenspan, but I do listen to enough conference calls during the week to stay current on companies such as his.

And his company’s recent earnings call provided just the sort of real-world insight into the real-time economic impact of the weak Dollar that Mr. Greenspan seems unable to see—perhaps owing to the lingering after-effects of all those days “discussing economic policy” with Ayn Rand and the rest of the Economic Doobie Brothers in those smoke-filled rooms:You would think that with weak U.S. demand for plastic resin, prices would be -- resin prices would be soft, but with the cheap U.S. dollar, a lot of the product is being shipped to foreign markets, which keeps the demand high, and with those higher material costs we haven't been able to pass along all those increases, just because of the competitive pressures.And that pressure is being driven by the dramatic drop in construction activity, not just residential construction but commercial and manufactured housing as well. These various construction markets currently add up to almost 40% of our total sales volume in Film, so it is a big factor.

—Ron Moquist, Raven Industries November 15, 2007

Maybe, technically, those Doller-related cost increases aren't getting into the Fed's computation of the Producer Price Index, adjusted as it is to exclude everything people actually use; but the impact on businesses such as Raven Industries is as real as the 4.9% price increase UPS just announced for next year.

Ironically, Greenspan made his Dollar comments at the “Learning Annex Wealth Expo” in New York City. No doubt The Donald was also there, and possibly Tony Robbins, giving their sure-fire get-rich-quick methodologies.

I wonder if David Crosby and Keith Richards were also in the wings, anxiously waiting to score some, er, Bolivian Marching Powder, if you get my drift, from the man they call “The Undertaker”...

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Friday, November 16, 2007

GWW held its annual analysts meeting on Nov. 14th at its HQ in Lake Forest, IL. The meeting was well attended by the buy and sell sides and was upbeat despite the company's expectation for slower economic growth in the balance of '07 and through '08…

For the record, “GWW” is the stock ticker for WW Grainger, the industrial distribution giant founded in 1927 with an eight-page catalogue, which today handles nearly a million products and has moved across borders into Mexico and Canada, as well as across the sea in a more recent and somewhat experimental effort in China.

Now, think not we make fun of Grainger itself, despite the “opulent” headquarters building referenced above.

Grainger is a well-run purveyor of anything you might need in the course of operating a production line, maintaining an industrial boiler, or keeping the lights on and the air conditioning running in an office building. Finance-wise, the business generates a healthy return on capital and grows steadily if not heroically.

No, we make fun of the word “Upbeat.”

“Upbeat” is a term much misused by Wall Street’s Finest, who seem to have an actual “Upbeat” key on their computer keyboards, somewhere between the “Enter” and “Page Down” keys.

In the peculiar language of that particular tribe of human beings constituting Wall Street’s Finest, “Upbeat” can mean anything from “Wildly optimistic” to “Grinning and bearing it.”

The trick is to read between the lines, ignoring the adjectives and focusing on the numbers.

In the case of Grainger, the two members of the analytical tribe quoted above are saying that, despite a less optimistic outlook for overall economic growth—something Grainger offers unusually good insight into, thanks to its business as the veins and arteries of the American economic lifeblood—the company actually gave better guidance for its own business in 2008 than the tribal elders might have expected.

Hence, “Upbeat.”

Other coded words and phrases in the tribal language of Wall Street's Finest, with translations provided by NotMakingThisUp, include:

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Thursday, November 15, 2007

I do think that the tax risk that we in particular face has been fully discounted in the stock price.

—Tony James, The Blackstone Group, President, COO

Companies that comment on their stock valuation generally run towards single-digit NASDAQ shooters, not NYSE-listed mega-caps—or, in the case of Blackstone Group, a company whose IPO at a total market value close to Lehman Brothers, which certainly marked the peaked of the Private Equity Bubble back in June, former mega-caps.

Which is why the Blackstone comments on its own stock valuation were so interesting.

Here is the context and the full quote from Mr. James, courtesy of the indispensible StreetEvents:

Just a word on taxes and Washington, DC, because I am sure I will get that question too. I don't think there has been any real change since we talked last quarter. The taxation of most publicly-traded partnerships and carried interest continues to be actively debated. There is no consensus that has emerged and it is really not predictable as to what ultimately will happen in the areas of particular interest to us, because there are powerful forces on both sides of this issue.

It is clear, I think, in general that taxes are going to go up and our goal remains just to see that we are treated consistently and fairly with other people. I do think that the tax risk that we in particular face has been fully discounted in the stock price [emphasis added].

How, precisely, would he or anybody else know exactly what has been discounted in the stock price of Blackstone?

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Saturday, November 10, 2007

With all due respect, I think you are a bit off the mark with your comments about ACCO's management.

So begins a well written, thoughtfully considered response to a NotMakingThisUp column by a reader identified as “Cadamyale.”

“Cadamyale” was responding to “An Inflationary Spiral Out of China,” in which we offered a back-handed slap at the management and business model of ACCO Brands—actually two such slaps—in the course of making a more pointed commentary about the inflation wave eminating from China.

China’s influence on the domestic inflationary scene, as readers will recall, was once downplayed by the current Fed Chairman, who, all evidence to the contrary, cast a skeptical eye on the importance of China’s role in keeping American consumer prices under control via the massive labor arbitrage of the 1990s and early 2000s—by which manufacturers such as ACCO substituted low-cost Chinese labor for high-cost US labor and regulatory constraints—as follows:

"There seems to be little basis for concluding that globalization overall has significantly reduced inflation in the U.S. in recent years; indeed, the opposite may be true," he [Bernanke] said.

—The Wall Street Journal.

Now, in our opinion, Bernanke’s comment was as astonishing as it was plainly wrong, and we said so (in Fed Big Flunks Eco 101, March 7, 2007):

If you quoted those words to my friend who runs a supplier of office products to Wal-Mart and other Big Box retailers, he'd probably spit out his coffee all over his Wal-Mart invoices.

Those invoices, at least on a per-unit basis, did done nothing but go down for the last decade, after Wal-Mart abandoned its “Made in America” campaign and began to enforce a constant price squeeze on its vendors, aided and abetted by the opening up of dirt-cheap manufacturing capacity in China

—JeffMatthewsIsNotMakingThisUp.

I not only stand by those remarks, but I make the following offer: I will provide Mr. Bernanke the telephone number of the office supplier in question, in case he ever wants to test his China Thesis.

I believe it would do our Fed Chairman good to brush up on his practical economics, for while he might know everything there is to know about “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression” (a 1983 Bernanke thesis available on Google Scholar), I think he is a bit out of touch when it comes to “The Mother of all Bubbles: How Communist China’s Deflationary Policy of Ravaging its Natural Resources, Enslaving its Farmers and Underpricing its Currency Allowed Alan Greenspan to Inflate the Heck Out of American Housing Prices” (a thesis I believe somebody, some day, will write).

Now, the office products supplier I am offering to hook up with Mr. Bernanke is not ACCO Brands.

.

It is, in fact, a small competitor that has been at the forefront of the production shift to China and, unlike ACCO, has seen its profitability rise while it has reduced costs to its customers, which include many of the same customers to which ACCO has been charging more and selling less.

The fact that it has been possible for at least one office products manufacturer to successfully transition its business model while ACCO has struggled to do the same tells me that the difference is not in the business itself, but in the management at the top, which is why I came down rather harshly on the ACCO folks in “An Inflationary Spiral Out of China.”

Nevertheless, we here at NotMakingThisUp encourage and admire informed opinion, and appreciate the fact that at least one reader—the aforementioned “Cadamyale”—was moved to offer not merely a negative reaction to our commentary, but an informed observation that adds some value to the issue at hand.

I quote from “Cadamyale” who clearly is not some inflamed Yahoo-message-board-stalking shareholder of ACCO Brands, but somebody with more than a rooting seat in the corporate stadium:

Without passing judgement on the merits of acquiring GBC (I think it is a bit early to determine whether or not this was a success), ACCO's management rightly chose to shed some unprofitable business and raise prices on some GBC products.

Prior to acquisition, and on the front end of the current inflation cycle, GBC guaranteed its customers' pricing for two years. ACCO raised prices this year. The resulting sales attrition has been more than expected, but buyers will come to see that ACCO offers a better product and value-added service than private label whiteboard suppliers and competing "laminating solutions"

The new product development cycle is coming. It includes a document finishing system that will allow the hapless assemblers of pitchbooks to change out pages without disassembling the entire book. It ain't sexy, but it is a better product.

GBC is a major restructuring and integration project that management has always targeted for completion in 2009. It took the same tack in assembling the legacy portfolio, which, while not the sharpest knife in the drawer, does generate 20%+ returns on tangible assets.

In my opinion, this is more a case of lack of investor/WSF patience than incompetent management.

While I appreciate these observations, I respectfully stand by our previous statements on ACCO. The company’s sub-1% return on assets—whether those assets are tangible or not—tells the story well enough, as does the following quote from the latest 10-Q, which makes it clear the company’s problems are not merely restricted to the woeful General Binding acquisition:

“The [sales] decrease was driven by the previously-planned divesture of non-strategic business…and volume decreases in all but the Commercial Laminating Solutions segment…partially offset by the positive impact of $16.3 million in currency translation as well as price increases implemented in North America and Europe in early 2007.”

Nevertheless, if the denizens of Yahoo message boards engaged in the kind of thoughtful and reasonable commentary as that of “Cadamyale,” we wouldn’t have readers like that to thank.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Thursday, November 08, 2007

ACCO Brands is not, as they say, the sharpest knife in the investment drawer.

After all, any company that calls one of its business units the “Laminating Solutions Group”—you know, binding reports nobody reads with nice plastic covers so they can’t go directly into the recycle bin?—has got to have a sort of Dilbert thing going on deep within the corporate culture.

And, indeed, ACCO has been of the over-promise, under-deliver category for quite some time, at least in the eyes of Wall Street’s Finest, who bought the ACCO “story” without doing the appropriate due diligence.

By “appropriate due diligence” I don’t mean traveling to China to visit ACCO’s plants or counting ACCO branded SKUs at Staples.

I mean, just listening to the earnings calls and deciding whether they make sense.

And in the case of ACCO, the earnings calls haven’t made much sense for quite some time—at least to the more skeptical listeners.

For example, the main thrust of the company’s turnaround efforts, which date back to a disastrous merger with General Binding (the aforesaid “Laminating Solutions Group”) has been to raise margins.

Now, that’s not a bad idea. But the way ACCO chose to raise margins was not the usual route—i.e. by slashing costs and turning out new products at higher mark-ups. No, they had a different strategy:

The real news this quarter is the continued substantial improvement in gross margin. This is the third consecutive quarter of gross margin improvement and continues to give me confidence of the steady long term improvement of operating margin after we are able to work through the SG&A investment cycles that we now have underway. The improvement in gross margin was largely driven by the price increases implemented in Office Products and Document Finishing, coupled with cost synergies partly offset by negative volume in all segments.

—ACCO Brands, May 2, 2007

You would think a company experiencing “negative volume” in a screamingly strong economic environment might have given a thought or two as to the wisdom of those “price increases,” and wonder what would happen should things slow down.

Apparently, however, nobody at ACCO asked the question, because management spent a great deal of time on yesterday’s call verbally head-scratching and finger-pointing every which way but at themselves:

In our third quarter July and August started out well. With the continuation of a strong second quarter performance. But September sales proved to be slower than we expected for our sales and across the industry. Our subsequent analysis tells us the underlying markets softened in both North America and Europe during the third quarter. Based on our own analysis and multiple conversations with customers as well as comments from industry analysts, there is a clear consensus that office product sales in September were down essentially for everyone.

—ACCO Brands, November 7, 2007

Unfortunately for ACCO’s shareholders, management seems not at all ready to give up on the price-raising-our-way-to-glory strategy now that business had turned emphatically down:

We see this downturn as part of a broader consumer trend which appears to be particularly affecting the retail and small business sectors. While we see ourselves as well-positioned, ACCO Brands is not immune to the economic forces pressuring American and European businesses. Nevertheless, we are holding firm to the fundamentals of our business strategy…

As I said in yesterday’s preview, ACCO is not the Hope Diamond of the office products world.

Nevertheless, the company did provide a fascinating first-person view of the inflationary trend in China, and it is no prettier than we here at NotMakingThisUp have been discussing for months:

There is a shortage of ocean freight capacity coming out of China which has driven up ocean freight rates particularly to Europe where, again, maybe you we don't perhaps realize this, but, Europe became a bigger customer for China than the United States at the end of last year and that's causing freight rates going to Europe, particularly, to go up.

And within China, what you are seeing is all the way down the coastal area of China which is a more developed area, we've seen significant labor inflation, coupled with a reduction of what used to be what I'll call start-up incentives that were given through Chinese VAT. Those -- elimination of those start-up incentives plus the significant labor inflation in that area is starting to cause an inflationary spiral coming out of China which you can then couple with the flotation of the Yuan with the U.S. dollar.

So, my biggest concern from a price pressure point of view right now, is China followed by oil and its trickle down effect to all the other commodities and energy….

So the only price pressures ACCO is seeing are:1. “An inflationary spiral coming out of China”2. Oil3. “All the other commodities”4. Energy5. Ocean freight.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Wednesday, November 07, 2007

The most interesting sentence fragment you will read today—at least, in our eyes—comes from a large U.S.-based company that sells its products around the world.

While this particular company would not qualify for one of Warren Buffett’s “Hope Diamond” type gems (“It’s far better to own a significant portion of the Hope diamond than 100% of a rhinestone”), it’s big, it’s important, and it’s suffering from a confluence of events not entirely of its own making.

Those events are of the making of Alan Greenspan’s free money policy of years past, combined with the get-rich-quick economic policy of the Communists who still run China, and the sentence fragment came during the course of a discussion about cost pressures arising at a time when sales pressures are intensifying—an unhappy combination for any business.

It is as follows:

“…an inflationary spiral coming out of China…”

We’ll have more on this at a later date: it just seemed unlikely we’ll see anything more interesting today….

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Monday, November 05, 2007

Another corporate big gets the axe, weeks after promising to right the foundering ship and receiving assurances of full support from key shareholders—in this case a Saudi prince—and his board of directors.

Citigroup Inc. Chief Executive Charles Prince is planning to resign at a board meeting on Sunday, according to people familiar with the situation, as the bank faces big new losses from distressed mortgage assets.

—The Wall Street Journal

No doubt Citibank shareholders will feel better, as Merrill Lynch shareholders did after their former star CEO got the axe (See “Chipping and Putting While Merrill Burns”).After all, everybody loves a sacrifice, don’t they?

But who, precisely, is the bad guy in the Citigroup story? Is it really Chuck Prince?

Full disclosure: I’ve met Chuck Prince once, in his role as Citibank’s representative to an inner-city fund foundation fund raiser, and I liked him. Still, I have no idea whether he’s liked at Citibank, which is where it counts, professionally, nor do I know what his peers think of him, or what role he played as Sandy Weill’s legal honcho during the years Weill was pyramiding financial acquisitions into the now-maligned Citigroup.

Still, was Chuck Prince the problem here? Did four years of Chuck Prince do something to Citigroup that destroyed an already-great company?

Today’s Wall Street Journal article contains a hint at the answer:

“We don’t have any culture and that’s definitely the problem,” says one long-time employee who asked not to be identified. That represents a big change from the 1970s and 1980s, when the bank had such a strong culture that other firms routinely raided Citi for top talent.

Hmmmmm… Recall the timeline behind Citigroup's creation:

1. Sandy Weill merges his Travelers Group with Citibank in 1998, shmooshing together two wildly disparate cultures into one financial smorgasbord re-christened as Citigroup.

And poor old Citibank hasn’t been its old self since. I repeat: hmmmmm…

Now, I don’t know Sandy Weill and I am sure he deserved every dollar of the nearly $1 billion he received in his years at Citigroup or CitiBank or CitiSmorgasbord or whatever it was he wanted to call it.

But I think if Citigroup’s shareholders and its board of directors and Wall Street’s Finest are looking for someone to blame, they might study a little more carefully the history of this patchwork of insurance companies, brokerage firms, and banks called “Citigroup,” and ask themselves whether they’ve dethroned the right man.

From the longer view, this looks more like the latest incarnation of the age-old public company shell game in which some fair-haired CEO convinces naive shareholders, gullible analysts and complacent board members that a kabillion dollar company can consistently outgrow the very market it serves quarter-by-quarter-by-quarter …until it can’t.

Chuck Prince—who ran Citigroup for four years—leaves in a cloud of humiliation and bad press. Meanwhile, Sandy Weill, who created Citigroup out of mergers and acquisitions that left it with “no culture” yet had the good sense to retire gracefully before the fallout, puts his Citigroup-generated stock-option uber-weath-enhanced name on hospital buildings.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.